Monday, January 24, 2011

More Capacity; Flat Goods Prices

News reports focused on the CPI growth of 3.3% and food CPI growth of 7.2%. Food and agricultural products are certainly the main source of price growth in China. Farm prices rose at an even higher rate: 12%-to-13% for grains and oilseeds, 57% for cotton, vegetables 17%, fruit 19%. Hogs were about the only agricultural commodity whose price did not rise.

Energy and metals prices also rose at rates similar to those of ag commodity prices. The housing component of the CPI was up 4.5% and health care up 3%.

Outside of basic commodities there is not much inflation. Manufactured products showed little or no increase in prices. The CPI for clothing was down 1%, durable goods were down slightly, and household goods showed no change.

A related factor is the composition of the 10.3% GDP growth. Fixed asset investment rose 23.8% and real estate investment was up 33%. Of the 39.8 trillion yuan in GDP, 27.8 trillion yuan was fixed asset investment. Exports were up 31%. Retail sales were up 18%, 14.8% in constant prices.

Much of China's growth reflects building capacity. The new factories turn out huge output that outstrips demand and pushes prices downward.

Agricultural GDP was up 4%. With rising agricultural prices and rising off-farm wages, rural household incomes grew more than 10%, faster than urban income growth.